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About Reverse Mortgages

If you are over 62 years old and are considering downsizing to your perfect home, or just expect to live in your current home for several years, you might want to consider a reverse mortgage. These types of loans are called “reverse mortgages” because the lender pays the homeowner. The money you receive from a reverse mortgage is tax-free, and can be used for any purpose. Unlike conventional mortgages, you do not need to make any monthly payments on a reverse mortgage for as long as at least one borrower continues to live in the home. However, you do need to keep paying taxes, insurance, and upkeep on the house.

During the time you have the loan, the lender charges interest and adds it to the amount you borrowed instead of making you pay it monthly. This means that the amount you owe gets bigger the longer you have the loan. When the last borrower moves out of the home or dies, the loan becomes due in full, including the amount borrowed plus interest. The loan is usually repaid by the borrower or their heirs through selling the home.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). This program is insured by the Federal Housing Administration (FHA), a government agency that is part of the U.S. Department of Housing and Urban Development (HUD). The maximum amount of money available, or “principal limit” can be up to $625,500 and is tax free.

What can a HECM be used for?

The money that is available to you from the HECM is first used to pay off any other oans against the house. After that, you can use the rest of the money for any purpose you choose, including living expenses, home repairs and modifications, home care expenses, paying off other debts, paying property taxes, etc. You can even use a reverse mortgage to purchase a new home, which might help you downsize to a house that suits you better or is closer to family.

Costs of a HECM:

Loan closing costs for a reverse mortgage are mostly the same as what you would pay for a traditional “forward” mortgage. You can finance these costs as part of the mortgage, which means that you don’t have to pay them out of pocket. These fees include an origination fee, appraisal, and other closing costs (such as title search and insurance, surveys, inspections, recording fees). HECM borrowers also pay a mortgage insurance premium that covers FHA insurance.

Eligibility for HECM loans:

The first step is to talk to a loan officer who is trained in reverse mortgages to determine if you qualify and if it makes sense for you. Then, all homeowners must meet with an independent government-approved reverse mortgage counselor, either in person or over the phone, before their loan application can be processed. This is to ensure that borrowers get objective information from an un-biased third party.

The home has to be in good condition and must meet HUD standards. Any existing mortgage or other debt on the home must be small enough to be paid off using the HECM funds. Unlike a conventional home equity line of credit, you cannot have a HECM in combination with another kind of home loan.

Financial assessment for HECM borrowers:

Unlike standard home equity loans, eligibility for HECM loans is not primarily based on credit history, although the lender will check your credit report. Lenders and HUD are primarily trying to make sure that you as the borrower will be able and willing to keep up your end of the bargain-paying the property taxes and insurance, and keeping the house in good condition. The most important factors will be whether you have paid your taxes on time and kept the home insured. The lender also may consider whether you have consistently paid other bills on time. In addition, they will look at your income and expenses to see if you have enough money to live on and still pay your property taxes and insurance.

If the lender sees evidence that you have had trouble paying your taxes and insurance in a timely way, or that you don’t have enough income to cover your regular monthly expenses, they may require what is called a “set-aside.” A set-aside means that the lender holds back part of the money from your loan, so that it can be used solely for the purpose of paying your taxes and insurance. In some cases, they may require that enough money is set aside to cover your taxes and insurance for your entire life expectancy (a number of years that is an estimate of how long you will live based on how old you are when you get the loan.) This can add up to a lot of money, especially if you are relatively young or live in a place with high taxes.

Advantages of a HECM:

  • Credit requirements for a HECM are less strict than for standard home equity loans and lines of credit.
  • Interest rates are not based on credit history.
  • There is no time limit on how long you keep the loan before you have to pay it off.
  • The funds available from a HECM line of credit can increase over time, depending upon interest rates.
  • If you had a mortgage before getting the HECM, that mortgage will be paid off and you will not have to make any more monthly payments. This gives you more money to live on.
  • There are no monthly payments to make on the HECM, as long as at least one borrower lives in the home.
  • You continue to own your house and can never be forced to leave, as long as your keep the home in good condition and pay your property taxes, insurance and any HOA fees.
  • You (or your heirs) will never have to repay mort that the value of the home if you sell the property to repay the loan, even if the value of your home goes down.
  • You can use the HECM line of credit to help family members now, rather than waiting until you pass away.